Understanding, calculating and using costs > Putting a price on injuries: direct and indirect organisational costs

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One of the most common issues with work disability is a lack of understanding and transparency when it comes to costs.

However it is in an organisation’s best interest to be able to put a price on different injury management options. An organisation that understands what it is dealing with is in a position to manage the situation.

The costs of work injuries are made up of direct and indirect costs:

•	Direct costs are payments made as a direct consequence of an injury. They arise from the payments made to the injured person and the impact this has on the insurance premium, as well as any fines that occur as a result of the injury.

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Indirect costs are more difficult to identify and are often ignored altogether when assessing the different courses of action available. They include the staff resources used to deal with an injury as well as the impacts of injury management on productivity, customer service and corporate image.

Direct costs are easy to identify and are often the main focus when injury management systems are reviewed, but the indirect costs of poor practice are higher. In fact, in poor practice systems, indirect costs are estimated to be between 2-10 times the direct costs.

Research has identified two equations that can be used to get a reasonable estimate of indirect costs:

Indirect costs = Direct costs x 4

Daily indirect costs = absent employee’s daily salary x 2*

*When the employee is on an average wage.

Direct costs often drive workplace approaches to disability management, but this approach can be expensive when the longer term impacts of case management are considered.

A longstanding employee reports a knee problem. There is some question about whether the problem is a result of non work related osteoarthritis. The enthusiastic WorkCover manager has the claim reviewed and determines that the problem relates to the person's pre-existing osteoarthritis. The condition is not accepted as a work related problem and the requested physiotherapy and scan are not paid for by the organisation.

The previously loyal employee considers that their knee problem is at least partly due to work. They feel that the review was unfair and become less engaged in their job.

Co-workers see that even loyal employees ‘get the short end of the stick’. Loyalty is reduced and over a period of time this lowers productivity and employee willingness to contribute to the organisation. Discretionary effort is reduced.

Six months later the same employee develops a sore back. They are determined that their second claim will not be rejected and, armed with their previous experience, know how to report the problem so that it will be accepted. The claim is accepted, and three months later they are still off work.

As the case study above illustrates, failing to take into account the indirect costs of injury management means that ‘savings ain’t savings’: what looks like a money-saving claim dispute may in fact be a money-waster.

Direct costs

Direct costs include:

•	Direct premium costs—ie, impact of the claims on WorkCover premium;

•	Any lost wages that are paid for by the employer before the WorkCover premium is activated – in many states this takes five to ten days;

•	Health and safety fines that occur as the direct impact of the injury; and (in most cases)

•	A threshold medical expense due from the employer to activate the insurance claim.

Indirect costs

Indirect costs include:

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Supervisor time

For a simple case this may only be an hour or two. For a case where the person remains on restricted duties in the long term, particularly when hours of work go up and down, supervisor time may be 50 to 100 hours. This would comprise one-on-one time with the worker, dealing with co-workers, training and supervising replacement staff, dealing with morale issues that can occur, and paperwork and administration.

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Human resources (HR) time

HR activities include time spent on return to work issues, as well as day-to-day administration and payroll issues. HR staff are responsible for communication with internal staff, external providers, treaters and claims managers. On top of these responsibilities, HR staff also undertake administrative duties: completion of forms and other paperwork, calculation of wages (often messy and complex), correspondence about pay and reimbursements, resolving problems, and paying accounts such as medical treatment invoices.

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RTW and Health and Safety staff time

Return to work coordinators may spend as little as one hour on a simple case, but a long term or complex case may consume weeks of a coordinator's time. The investigation of a significant injury, time spent defending fines or being involved with litigation can consume days or weeks of Health and Safety staff time.

If a case is disputed, there may be time taken for the investigation of the claim, time taken for discussion with claims staff, and time spent at conciliation. For major claims, there may be substantive time spent on court cases.

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Staff replacement costs

Staff replacement costs make up a significant proportion of the indirect costs. In the short term situation a casual employee may be employed to perform the duties of the injured or ill worker. A casual employee will usually require training and will often work at lower levels of productivity while receiving a higher rate of pay. There may also be advertising and other recruitment costs.

•	Reduced productivity Staff on restricted duties are paid their normal rate of pay. However their productivity can be between 5 - 95% of their normal productivity.

•	Impact on company morale Discretionary effort is a significant component of productivity. Employees who feel that they are not well-treated have a lower level of discretionary effort.

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Impact on customer service

For smaller organisations, the indirect costs usually make up an even larger proportion of overall costs of poor injury management. In a small business, the absence of just one employee can have a huge impact on customer service. There are fewer other staff who can step in to cover a job, and loss of customers results in long term impacts on business turnover.

A well-known chef in a small-town restaurant sustains a back problem. Because of the way the situation is dealt with the chef remains off work for many months. Customers of the restaurant learn about what has happened and realise that the chef is not returning. Customers go elsewhere and the restaurant’s revenue is significantly diminished.

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Company reputation

An organisation’s reputation is built up over time. Poor performance in return to work damages a company’s reputation. This impacts on how others deal with the employer: for example doctors, claims managers, the dispute resolution system, and courts. Poor injury management damages an organisation’s internal reputation, as well as amongst the broader community.

Estimating Daily Indirect Costs:

A simple estimate of the daily indirect costs of someone off work is twice their daily wage

Indirect Costs Include:

•	Supervisor time

•	Human resources (HR) time

•	RTW and Health and Safety staff time

•	Staff replacement costs

•	Reduced productivity

•	Impact on company morale

•	Impact on customer service

•	Company reputation

Indirect Costs Include:

A simple estimate of the daily indirect costs of someone off work is twice their daily wage

•	Supervisor time

•	Human resources (HR)time

•	RTW and Health and Safety staff time

•	Staff replacement costs

•	Reduced productivity

•	Impact on company morale

•	Impact on customer service

•	Company reputation

Direct and indirect costs are important, but they are not the whole story.

For information on how to get a fuller picture of how your organisation is performing in terms of disability management, see:

Injury, disability and lost time patterns